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Category > Business & Finance Posted 20 Jun 2017 My Price 11.00

Choosing an Optimal Debt Level

Choosing an Optimal Debt Level

Greenleaf Industries is considering adding leverage to its capital structure. Greenleaf ’s managers believe they can add as much as $35 million in debt and exploit the benefits of the tax shield (for which they estimate τ* = 15%). However, they also recognize that higher debt increases the risk of financial distress. Based on simulations of the firm’s future cash flows, the CFO has made the following estimates (in millions of dollars): 21

Debt

0

10

20

30

40

50

PV (Interest tax shield)

0.00

1.50

3.00

3.75

4.50

5.25

PV (Financial distress costs)

0.00

0.00

0.38

1.62

4.00

6.38

What is the optimal debt choice for Greenleaf?

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Status NEW Posted 20 Jun 2017 06:06 AM My Price 11.00

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